Leaning on Fiat's Sense of Direction To Guide Chrysler
U.S. Looks to Italian Firm's CEO For Model to Help Repair Detroit
Tuesday, April 14, 2009
When corporate executives brief Wall Street analysts, they can usually be counted on to put their companies' performances in the best light. But Fiat's engaging chief executive Sergio Marchionne rarely minces words. After taking the wheel at the Italian automaker in 2004, he promised analysts he would do "radical surgery" because "we've got an organizational structure that needs to be snapped out of its stupor."
Marchionne purged Fiat's management, bringing in outsiders and ordering up snappier car models that helped double Fiat's market share in four years. He demonstrated skills as a dealmaker, extracting $4 billion from General Motors to end a complex agreement with the Detroit firm. And he persuaded some of Fiat's biggest lenders to accept common stock in return for slashing Fiat's debt.
Now the Obama administration is wondering whether Marchionne can do for Chrysler what he did for Fiat. Marchionne is "unconventional, but it seems to work," an administration official said. "We believe he's kind of the real thing in his own way."
Chrysler is struggling to avoid bankruptcy, and the president's auto task force is weighing whether to pump another $6 billion into Chrysler. The Obama administration has decided that Chrysler needs a partner to survive, and it has put its hopes in Fiat and Marchionne. It has given Fiat and Chrysler until the end of the month to negotiate partnership terms.
An examination of how Fiat has evolved under Marchionne, as well as his views on the U.S. auto market and his management style, sheds light on the type of company that a Chrysler-Fiat marriage could create.
A linkup could bolster Chrysler's limited product line with Fiat's small, fuel-efficient cars while giving Fiat access to the United States through Chrysler's established distribution network.
It would also dovetail with Marchionne's strategy to expand Fiat, and his assessment of the U.S. auto industry, which is as blunt as his earlier assessment of Fiat. "U.S. car companies have lived in a dream world," he said in an interview a few weeks ago. "Their financing activities covered up the sins on the industrial side."
Fiat might not be among the world's biggest car companies, but at least it made money last year. "I made 2.2 million cars last year and made [$1.3 billion], more than GM with 8 million car sales," said Marchionne, who prefers open collars and sweaters to ties and suit jackets. "Size is important if done well. . . . If you're doing it for ego, that's worth nothing."
The chances of a Fiat-Chrysler marriage are still remote. If it does happen, Fiat would get a 20 percent stake in Chrysler in return for giving Chrysler access to Fiat's line of small cars and Fiat's international sales network. Some of Chrysler's current brands would be eliminated and some assembly lines retooled to produce the Fiat 500 and Alfa Romeos. Chrysler would be better able to sell its most popular brands, such as Jeep, abroad. Fiat would reenter the U.S. market after a 23-year absence. If the arrangement works, Fiat might ultimately acquire 51 percent of Chrysler.
Chrysler's financial needs are immediate, whereas introducing Fiat cars will take time. The Fiats need to be reconfigured to meet U.S. regulations, and Chrysler assembly lines need to be revamped; Fiats might not appear in U.S. showrooms until 2011. So Chrysler still needs to persuade unions and bondholders to accept deep cuts now. Fiat, whose own debt rating was reduced to "junk" status by Standard & Poor's last week, said it does not plan to provide cash to Chrysler or to assume any of Chrysler's debt.
"Getting this thing done by the end of this month is a Herculean task," said Maryann N. Keller, an auto analyst and author of a book about GM.
The Comeback Kid
Fiat has been absent from the U.S. car market for two decades, and those who remember its earlier vehicles have mixed memories. Fiat was said to stand for "fix it again, Tony," Keller said.
But the sporty, small Fiats also had a following. Niels Uni, a California nurse, bought his first Fiat after getting engaged in 1979. It was a sleek 124 Spider, a metallic brown two-seater with a tan convertible hood. When he divorced, the car was a key sticking point in settlement negotiations. In the end, his wife got the car.
But Uni still has four other Fiats -- including a Spider, Lancia Scorpion and Alfa Romeo -- and is an officer of Fiat America, a group of Fiat fans that was founded in 1969 and meets every month at Harry's Hofbrau in Redwood City, Calif.
"Fiat makes really cool cars," Uni says. "In the early years Fiat got bad press because some of the cars were put together poorly. But our group is celebrating its 40th-year anniversary, and for a car that hasn't been imported since 1986-87 that's pretty impressive."
For a while, though, the fan base was shrinking. Fiat's market share in Europe contracted to 5.8 percent in 2005 from 9.4 percent in 2000.
That's when Marchionne took over. He wasn't typical of Fiat chief executives. Because his family moved from Italy to Canada when he was 14, he grew up and attended university in Canada, only returning to live in Europe when a job took him to Switzerland at 41.
Like Ford's Alan Mulally and Nissan/Renault's Carlos Ghosn, Marchionne's experience wasn't in the automobile business. A lawyer and accountant, he worked for Deloitte & Touche in Canada and then at an international packaging company in Toronto. He moved to Europe to run a Swiss chemicals company and then a Swiss inspection and testing service firm, gaining a reputation as something of a turnaround expert. He was appointed to the Fiat board and a year later took charge of the company, which had suffered from weak leadership as cancer struck down two members of the Agnelli family, Fiat's biggest shareholders.
Marchionne led the comeback. The new Fiat 500 is a hit, especially in Italy, France and Spain, though sales have lagged in Germany, Britain and the rest of northern Europe.
"Fiat didn't just survive. It prospered," Keller said.
Asked whether Fiat could make money selling small cars in America, Marchionne said "Toyota does."
Envisioning a Lean Future
This year, Marchionne told analysts, Fiat expects a 20 percent drop in sales. Compared with declines for U.S. automakers, that isn't bad. Germany's "cash for clunkers" program, which pays people to trade in older vehicles for newer, more fuel-efficient ones, is boosting Fiat sales, analysts say.
Still, Marchionne is worried about the future.
Speaking to Swiss bankers and businessmen on March 24, he recalled Pharaoh's dream in the Bible. In the dream, seven lean cows devoured seven fat cows, which Joseph interpreted as meaning seven years of famine would follow seven years of plenty.
"The auto industry has had its seven years of abundance, and the problems it now faces are like those seven lean, ugly cows," Marchionne said.
The answer, he has been telling people, is consolidation or alliances that permit shared investments. He predicts that in 24 months as few as six global auto companies will remain.
"The need to achieve large economies of scale -- to share the huge investments in product and market development -- will result in a new round of aggregations," he told his Swiss audience.
He told analysts in January that Fiat's proposed alliance with Chrysler was "a first step in the direction. By far it's not the last." A partnership with Chrysler could eventually give Fiat a 51 percent ownership stake in the U.S. carmaker. (Marchionne originally got Chrysler to agree to an initial 35 percent stake, but the figure was rolled back to 20 percent by Obama officials, who thought it was too generous and wanted more flexibility in persuading banks to accept shares to reduce Chrysler's debt.)
Many analysts also believe that Marchionne is positioning Fiat to scoop up Chrysler assets if the U.S. company ends up in bankruptcy. One of Chrysler's most prized brands, Jeep, would sell well in Brazil, one of Fiat's main markets.
Marchionne, who totaled his Ferrari in late 2007, says "car guys" have always focused on luxury brands, like Fiat's Ferrari and Maserati lines. In fact, he said, the auto industry's fate is tied to mass-market vehicles. "We are going to pay dearly if we delude ourselves that we are operating in the luxury end of the business," he said in Switzerland. "We have to understand that this is a Wal-Mart industry."
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Leaning on Fiat's Sense of Direction To Guide Chrysler - washingtonpost.com
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